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Pursuant to a congressional request, GAO provided information on how the European Economic and Monetary Union (EMU) and the enlargement of the European Union (EU) may affect U.S. allies' ability to sustain or increase their defense budgets, focusing on: (1) projected defense spending for several European countries; (2) budgetary effects of EMU implementation and EU enlargement; and (3) other significant factors that may affect countries' ability to share in the costs of the North Atlantic Treaty Organization (NATO) over the long run.

GAO noted that: (1) the United States' security strategy depends on the ability of its allies to join in military operations; (2) this ability includes being able to train and equip forces to meet certain requirements; (3) although EMU requirements for additional deficit reduction are likely to mean tighter budgets, NATO's West European member countries generally plan to maintain their defense budgets at roughly constant levels through 2002; (4) EMU's budgetary constraints may be offset over time by fiscal benefits and economic growth; (5) a large number of observers are optimistic about EMU's effects on economic growth, but concerns remain; (6) the costs and budgetary impacts of EU enlargement are not readily identifiable, since several key political decisions regarding the timing and specific requirements of membership have not been made; (7) however, these costs are likely to fall largely on prospective, not current, EU members; (8) over the long term, defense spending will face increasing pressure as Europe attempts to deal with a number of domestic social issues, in particular escalating entitlement burdens; (9) spending for public pensions, for example, is already near or above 10 percent of gross domestic product in France, Germany, and Italy--more than twice the U.S. percentage--and is projected to begin to increase sharply in 10-20 years as populations age; (10) governments' spending for health care is also expected to rise, increasing the budgetary pressures from coming demographic changes; (11) this budget environment means that member countries are likely to continue to face significant challenges in modernizing their defense forces to meet NATO requirements; (12) ultimately, the amount of resources allocated to defense is a political decision, driven substantially by views of military threat as well as other competing budget priorities; (13) if EMU's fiscal constraints require further spending cuts, for example, impacts on defense budgets will clearly depend on policy decisions regarding where those cuts are made; (14) should EMU and EU enlargement contribute to stronger economic growth in Europe, there will be more budgetary resources to address competing needs; and (15) the outcomes from these economic developments and political decisions have important implications for U.S. defense planning.